The 1031 Exchange Of Property
The 1031 exchange is a technique used in the real estate investment sector. Even though it is illegal not to pay taxes out of a sold property, this technique ensures the tax evasion is legal. To do so, there are conditions put in place to ensure that the procedure is properly followed.
Within forty five days of disposing of an investment property, the money acquired needs to be used to obtain another property the investor wishes to obtain in order not to pay the tax. A maximum period of six months is issued as the probation period of closing escrow. The two properties: the purchased and the sold are to be of like kind. This means that their functions are of business and investment nature so as to be termed as like kind. It is possible to use this technique as many times as possible on an investment and in this way, the investor is always assured of not paying required taxes throughout their investments. The down leg property is the property an investor disposes using the 1031 exchange. Likewise the property being acquired in the technique is the up leg property.
In real estate, the 1031 exchange technique is widely practiced as it saves investors a lot of money. This means that the investors who practice it will always be assured of passive income. In this kind of income, a given investor does not suffer the burden of funding the acquisition of the investment property that will aid in generating income. Since the ownership of investment is transferred from the down leg property to the up leg property, then the investor does not have to create funds to have a new property to generate income. This means that the investor will at all times possess the property that generates passive income using the 1031 exchange.
Sometimes in real estate, property is lost due to unavoidable factors such as theft or to fire. This means that the investor would have to replace the lost investment with a replacement property. This is so as to compensate the occupant of the initial property as well as to maintain the investment. This, of course, comes as an expense to the investor and sometimes a loss because the replacement property more often than not usually costs more than the initial property. There are times that the affected investor would intent to defer the taxes associated so they would have to use the 1031 exchange and transfer the investment from the lost property to the new one in the constraints of the technique.
As an alternative to the normal method of operating real estate investments, the 1031 investment property exchange is very benefiting to a given investor following that trail.
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